Indonesia updates its Mining Law and endeavours to create greater operational certainty

Indonesia

The Indonesian mining industry has had consistent struggles in navigating a complicated legislative framework since the 2009 Mining Law come into force. Whilst the 2009 Mining Law was aimed at removing a lot of the systemic bureaucratic issues hampering the industry, its unpredictable implementation and ongoing band-aid regulations (many of which conflicted) along with controversial events (such as the Churchill Mining fraud and expropriation litigation) left the sector in need of a further overhaul. That overhaul is now upon us with the 2020 amendment to the Mining Law, which appears (on the face at least), to provide a clearer framework for the industry and at the same time align with the government’s agenda of stimulating value adding downstream industrialisation. We examine whether the 2020 iteration gives rise to genuine optimism and if further issues should be expected. 

On 10 June 2020, Indonesia’s President Joko Widodo signed a bill amending Law No. 4 of 2009 on Minerals and Coal Mining (“2009 Mining Law”) which has now been ratified into Law No. 3 of 2020 (“2020 Mining Law”). The amendments were enacted with a view to reinvigorate the mining sector and encourage investment in mining exploration.

As with new laws in Indonesia, there is a lag between the passage of the ‘Law’ and release of the all-important implementing regulations, and the 2020 Mining Law is no different. The upcoming regulations to the 2020 Mining Law (“New Mining Regulations”) should provide greater clarity on how the new provisions in the 2020 Mining Law will be implemented. We expect these New Mining Regulations will likely be issued in about 12 months-time; however, history indicates that this timeframe could be extended.

Ahead of the New Mining Regulations, we briefly explore some welcome changes that the new law brings.

Centralised Licensing Process

There has always been an uneasy ‘tug-of-war’ between central and provincial government authority over licensing in the mining industry, much of which germinates from the complexities imbued in Indonesia’s regional autonomy law. Under the 2020 Mining Law, the Indonesian Central Government, through the Ministry of Energy and Mineral Resources (“MEMR”), now has exclusive authority to issue licenses in the mining sector. Previously, the MEMR’s role was limited to granting mining licenses for inter-province mining operations and licenses held by foreign investment companies. Notwithstanding, the new mining law authorizes the MEMR to delegate its authority to issue licenses in the mining sector to provincial governments.

It is thought that conferment of exclusive authority to the Central Government will facilitate ease of doing business by reducing the need for mining companies to deal with local or regional bureaucracies where processes can be more opaque. That said, it is not clear at this juncture how and to what extent the MEMR will delegate its authority to provincial governments, and the extent to which the issue and renewal of mining licenses will be streamlined and simplified in practice going forward.

Extension of mining operations brings comfort

Prior to the 2009 Mining Law, the legal framework for mining operations in Indonesia comprised a bifurcated regime of (i) Mining Rights (“KPs”) for Indonesian miners, and (ii) Contracts of Works (“COWs”) and Coal Contracts of Work (“CCOWs”) for large scale and foreign-investment mining business activities, a tried and tested generational system (if not with some flaws). The 2009 Mining Law implemented a new single area-based licensing system whilst allowing legacy COWs and CCOWs to continue until they expired. KPs were subject to an accelerated conversion process.

Under the 2020 Mining Law, subject to government review, COWs and CCOWs that have not been granted an extension may be converted into an IUPK (being a special mining licence) for an initial maximum term of 10 years, and may be extended again for a maximum of another 10-year term. Meanwhile, a COW or CCOW that has already been extended can be converted into an IUPK for a maximum term of 10 years.

The 2020 Mining Law also provides guarantees for the extension of mining operation periods. For example, the production operation phase of mining metallic minerals is granted for an initial term of 20 years, with two guaranteed extensions, each for an additional term of 10 years each. The effect of such extensions in the 2020 Mining Law effectively guarantees the continued operations of some of the largest coal miners in Indonesia, where some mining contracts were due to expire between 2020 and 2025.

It is likely this is an attempt to improve the feasibility and bankability of mining operations in Indonesia over a longer tenure, which in theory would allow businesses to recover initial investments made in the capital intensive phase of mining (i.e. exploration and construction phases) as the period of mining operations are extended (albeit subject to the applicable divestment rules – discussed further below).

Assignment of Licenses

Previously under the 2009 Mining Law, the assignment of licenses was prohibited save for transfers to a related company (being a company in which the original license holder held at least 51% of the shares) as part of corporate reorganisations. Under the 2020 Mining Law, mining license holders are now allowed to assign their licenses to any party with the MEMR's approval. Assignments can only be granted upon the assignor's satisfaction of certain conditions, including the completion of the exploration phase, as well as certain administrative, technical, and financial requirements.

Whilst it is hoped that the lifting of the prohibition against the assignment of mining licenses will give more flexibility for corporate re-structuring, the sale and transfer of mining business and operations, and joint venture business opportunities, there is still some uncertainty on how the procedure for assignment or the details of the conditions for assignment will take place. It is hoped these will be clearly set out in the New Mining Regulations along with any tax / non-State tax implications spelt out (if any).

Divestment Requirements

Under the 2009 Mining Law, all foreign-invested mining companies were required to divest its shares to Indonesian parties after the fifth year of commercial production, such that by the tenth year of commercial production at least 51% of the total issued shares of such foreign-invested mining companies will be owned by Indonesian parties. The central government, regional government, and Government entities had a right of first refusal in the purchase of such shares ahead of 100% domestically owned private companies.

The 2020 Mining Law preserves the the obligation for foreign-invested mining companies holding IUPs/IUPKs to ensure a minimum of 51% local ownership, but is now silent on the applicable timelines to do so and merely states that the divestment obligation must be conducted in stages. Until the New Mining Regulations are enacted, it will not be clear what impact this will have on investors or miners.

Have we turned a corner?

The 2020 Mining Law appears to be the Indonesian government’s effort to reinvigorate investment in the mining industry in Indonesia. Foreign investment in mining activities has suffered considerably in previous years due to a range of factors and uncertainty, some of which appear to be addressed in the 2020 Mining Law.It remains to be seen how the new law will be effectively implemented in Indonesia. The wait will be likely be a long one, the 2020 Mining Law prescribes that the government shall not issue any new mining-related licenses for six months upon its enactment or until the New Mining Regulations are issued. We will continue to watch the new direction of travel with interest.